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China vows more flexible yuan, unveils record trade surplus
2007-03-12
China announced a huge February trade surplus Monday, putting the spotlight once again on its controversial currency regime just hours after the central bank promised to make the yuan more flexible. The customs authorities said there was a near-record 23.8-billion-dollar trade surplus in February, almost 10 times the year earlier figure and certain to spark more protests that China keeps the yuan deliberately undervalued to gain an export advantage. "It's something of a surprise," said Jason Chang, a Shanghai-based economist with Standard Chartered. "But the implications are clear. This year's trade surplus will be even bigger than last year's." China's surplus last year soared 74 percent to hit a record 177.5 billion dollars but some economists are pencilling in 230 billion dollars for 2007. February exports totalled 82.1 billion dollars, up 51.7 percent from a year earlier, while imports increased 13.1 percent to 58.3 billion dollars, the General Administration of Customs said. The trade surplus is a major bone of contention with China's trade partners, especially the United States which claims a weak yuan is a major contributor to the problem and the February data could worsen the atmosphere. "These figures will definitely cause American mercantilism to rear its head," said Standard Chartered's Chang. In an apparent bid to address overseas pleas to address the surplus, central bank governor Zhou Xiaochuan said Monday that exchange rate policies could go some way toward tackling the problem. "As a supplementary policy, exchange rate policy can have a certain function as price leverage and can help adjust the balance between imports and exports," Zhou told reporters at a briefing. A statement issued alongside Zhou's appearance before the press and dealing with objectives for 2007 suggested slightly more vigorous application of this leverage in the year ahead. "The managed floating exchange rate regime will be further improved and the flexibility of the exchange rate will be enhanced," the statement said. "(We will) keep the exchange rate basically stable at an adaptive and equilibrium level," it said, repeating a standard formula. The managed floating exchange rate regime is China's way of describing a system which still appears to many observers to be tightly controlled by the authorities. In July 2005, China delinked the yuan from the dollar and since then it has risen by nearly seven percent against the US unit, including a 2.1 percent revaluation at the time of the decision. The yuan was also set in a daily trading band against the dollar of 0.3 percent either side of a base rate set by the authorities. In practice, daily changes have not come anywhere near that modest amount, sparking protests that Beijing still keeps the yuan on a very tight rein. Even as the central bank promised a more flexible yuan, Zhou on Monday gave no direct indication of concrete measures, such as whether the trading band might be expanded. Some local economists argued, based on February's trade data, that there was no direct way of addressing the surplus via the exchange rate. Since a large portion of China's exports is value-added, with must inputs imported from elsewhere, a higher yuan will simply trigger more exports by making these imports cheaper, they said. "This shows that a rise in the yuan is much better at triggering more exports than in reining them in," said Zuo Xiaolei, Beijing-based chief economist with Galaxy Securities. Central bank chief Zhou noted that China's export costs were rising due to higher labor and social security costs and the country has also taken a series of measures to boost imports, such as buying a large amount of raw materials from overseas. "Both exports and imports are growing. We have to see which one runs faster," he said. Speaking at the same briefing, Commerce Minister Bo Xilai insisted the Chinese government was not seeking a large trade surplus and was actually hoping for a balance in its international payments. "The surplus was not formed only because of trade issues; it has developed due to the industrial structure and the overall situation with the global economy," he said. "So we should not expect to see the resolution of the trade surplus problem in the short-term, or only because of some trade measures."
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